Here is how you protect yourself when you decide to sell a property and carry the note:
- Know Your Buyer. Either you or your real estate agent need to play the role of detective. Ask a lot of questions. Why can’t the buyer get a bank loan? How long has he been with his employer? Why does he want to live in this neighborhood? What kind of car does he drive? What is the condition of that car? What is his credit history? Who will live in the property with him? Will anyone else contribute financially to the note payments? Does extended family live in the area? If you are agreeing to be tied to the note for as many as 30 years, please get to know your buyer.
- Max the Down Payment. A down payment is protective equity for the seller. The bigger the down payment, the more protection. The more committed is the buyer. Always negotiate the largest down payment possible.
- Shorten the Term. If I lend money to a friend, do I want my money back sooner or later? If a note buyer invests his funds in a promissory note, would he prefer to get his money back sooner or later? Most folks do not want to wait 20 or 30 years. Negotiate the shortest term possible.
- Up the Interest Rate. Normally, the reason a buyer can’t get a bank loan is because either he or the property don’t meet the lender’s standards. That leaves the seller 2 options – find an all cash buyer or carry the note. Experienced note investors will demand an interest rate above current mortgage rates in order to be compensated for not cashing out.
The idea is to sell the property, of course, but the focus should be on finding the right buyer and agreeing to strong terms. Then, you are protected if you keep the note for income or sell for cash.
